Compensation & Reward Management

THE PAYMENT OF BONUS ACT, 1965

The Payment of Bonus Act, 1965 - History
 The practice of paying bonus in India appears to have originated during First World War when
certain textile mills granted 10% of wages as war bonus to their workers in 1917.
 In 1950, the Full Bench of the Labour Appellate evolved a formula for determination of bonus.
 A plea was made to raise that formula in 1959.
 At the second and third meetings of the Eighteenth Session of Standing Labour Committee
held in New Delhi in March/April 1960, it was agreed that a Commission be appointed to go
into the question of bonus and evolve suitable norms.
 A Tripartite Commission was set up by the Government of India to consider in a comprehensive
manner, the question of payment of bonus based on profits to employees employed in
establishments and to make recommendations to the Government.
 The Government of India accepted the recommendations of the Commission subject to certain
modifications.
 To implement these recommendations the Payment of Bonus Ordinance, 1965 was
promulgated on 29th May, 1965. To replace the said Ordinance the Payment of Bonus Bill was
introduced in the Parliament.
 Objective
The Payment of Bonus Act, 1965, aims at providing for the payment of bonus
to the employees of certain establishments, and for matters concerned
therewith.
The scheme of the Act is 4 dimensional:

1. To impose statutory liability upon the employers of the establishments

covered by the Act to pay bonus to the employees in the establishments;

2. To define the principles for payment of bonus according to the prescribed

formula;

3. To provide for payment of minimum and maximum bonus and linking the
payment of bonus with the scheme of ‘set off and set on’ and

4. To provide machinery for enforcement of liability for payment of bonus,

with a view to minimizing the disputes on this account.
 Scope and Coverage
The Act extends to the whole of India and is applicable
to every factory and to every other establishment
wherein 20 or more workmen are employed on any day
during an accounting year.

Employees Entitled
Every employee receiving salary or wages up to Rs.
21,000/- p.m. and engaged in any kind of work
whether skilled, unskilled, managerial, supervisory,
manual, etc., is entitled to bonus for every accounting
year, if he has worked for at least 30 working days in
that year.
A probationer is eligible for bonus.
Sweepers working on part time basis are also eligible
for bonus.
Bonus is payable to daily wagers as well.
 Calculation of Bonus
Method to calculate bonus:

1. Calculate the gross profit.

2. Calculate Allocable Surplus = A+B,

where
A = Gross Profit – Depreciation – Development Rebate or
allowance – Direct Taxes – Sums specified in the Third
Schedule.

B = Direct Taxes in respect to gross profit.

3. Calculate allocable surplus.

Allocable Surplus = 60% of Available Surplus.

4. Make adjustment for ‘Set – on’ and ‘Set – Off’.

5. The Allocable Surplus computed is distributed amongst

employees in proportion to salary or wages received by them
during the relevant accounting year.
 Minimum Bonus
The Minimum bonus which an employer is
required to pay even if he suffers losses during
the accounting year or there is no allocable
surplus, is:
a. 8033% of the salary or wages during the
accounting year, or
b. Rs. 100 in case of employees above 15 years
and Rs 60, in case of employees who were
below 15 years, at the beginning of the
accounting year,
Which ever is higher.
 Maximum Bonus
If in any accounting year, the allocable surplus,
calculated after taking into account the
amount ‘set = on’ and ‘set – off’, exceeds the
minimum bonus, the employer should pay
bonus in proportion to the salary or wages
earned by the employee during that
accounting year.
However, bonus should not exceed 20% of
such salary or wages.
 Deductions
Following amounts can be adjusted against the amount of bonus payable:
1. Any customary/ festival/ interim bonus paid.
2. Any financial loss caused by the misconduct of the employee.

Forfeitures
An employee shall be disqualified from receiving bonus, if he is dismissed from
service for fraud, or riotous or violent behavior, or theft, misappropriation or
sabotage of any property of the establishment, not only for the year in which he is
dismissed but also for the past years remaining unpaid to him.
THANK YOU!
UNNATI GALA